Expert: Don Sadler - 9/23/2005

Question
Greetings.  I was hoping you could provide a 'rule-of-thumb' that would help me determine the approximate value of an ongoing business.  This would be a great help to me for retirement planning, etc.  Any advice you could offer will be appreciated - thanks.   Larry

Answer
Larry,

Business valuation is not my field of expertise.  However, so long as you accept that this is outside normal area of advice, I will offer some general food for thought on this subject.  And some links to additional information.

First, valuating a business is as much (or more) art than science.  In the final analysis, a business is worth what someone will pay for it.  That said, there are several different methods to approach business valuation.

Three of the most common are:

BOOK VALUE: The business valuation based upon the accounting books of the business. Assets less liabilities equal the owner's equity, which is the "Book Value" of the business.  This method is problematic because the accounting records may not accurately reflect the true value of the assets in the business valuation. For example, some assets may be depreciated while others are not, or simply that inconsistent values (new, market, actual) may have been used in recording the assets.  Finally, accounting records may not include all assets.

ADJUSTED BOOK VALUE METHODS:
 Tangible Book Value is different than book value in that it deducts from asset value intangible assets, which are assets that are not hard (e.g., goodwill, patents, capitalized start-up expenses and deferred financing costs).

 Economic Book Value allows for a value analysis that adjusts the assets to their market value. This business valuation allows valuation of goodwill, real estate, inventories and other assets at their market value.

SALES MULTIPLE BUSINESS VALUATION METHODS: Sales and profit multiples are the most widely used business valuation methods benchmark used in valuing a business. The information needed are annual sales and an industry multiplier, which is usually a range of .25 to 1 or higher. The industry multiplier can be found in various financial publications, as well as analyzing sales of comparable businesses. This method is easy to understand and use. The sales multiple is often used as the business valuation benchmark.

REPLACEMENT VALUE: This type of business valuation is similar to an adjusted book value analysis. Replacement value is different than liquidation value in that is uses the value of the replacement value of assets, which is usually higher than a book valuation. Liabilities are deducted from the replacement value of the assets to determine the replacement value of the business.

These methods (and more) are discussed in greater detail with examples of calculations is a free document you can obtain at http://www.williams.org/valuations.pdf

An interesting article for you that discusses appropriate questions and considerations is at http://www.camagazine.com/index.cfm/ci_id/19240/la_id/1.htm

There is a free business valuation course you can take on-line at http://www.conweb.com/value/course.shtml

You can obtain a lot of free Excel spreadsheets for doing valuations at the following locations:
http://www.exinfm.com/free_spreadsheets.html
http://www.jaxworks.com/toc.htm
http://www.peacockcapital.com/resources_excel.htm

Finally, the National Business Valuation Group (http://www.nationalbizval.com/) offers professional services to do valuations as well as a lot of free information at http://www.nationalbizval.com/HelpfulSites.htm

I hope this is at least a little helpful and sorry I don't know more about the subject.